By Ray Birch
GLOVERSVILLE, N.Y.—Noting the price for building capital today is high, one credit union is setting its loan rates at the upper end of the market, believing that intentionally slowing loan demand right now may not be a bad thing.
And at the same time, the credit union told CUToday.info, new attention must be directed toward deposits.
“If we look back over the last 10 to 15 years, inflation was low and interest rates were low for an extended period of time. I think credit unions and leadership of credit unions concentrated solely on growing loans and there was always a ready source of funding,” said Ed Lis, CFO at the $165-million First Choice Financial. “We didn't really need to come up with a deposit strategy.”
But that is no longer true, with some in credit unions stating in recent months that CUs should consider having a chief deposits officer as rates remain high in a very competitive market.
“We really haven’t seen these kinds of highs since the Reagan era,” noted Lis, a member of the CUNA CFO Council. “We're seeing many credit unions with unrealized loan portfolio losses, and many of the loans in our portfolios are probably priced below market rates. You can't sell your investments. You can't sell your loans. We're seeing some deposit runoff since members now have options, and you can very easily transfer money into higher-yielding savings accounts, even checking accounts.”
Dipping Into Savings
Moreover, Lis pointed out more members are now dipping into savings to deal with the higher costs of gas and groceries.
“As we know, just the cost of living has increased. Loan demand is now definitely outpacing deposit growth—before we had positive deposit growth, and then we were always trying to make loans. That dynamic has flipped,” Lis said.
The fact many credit unions have seen loan growth outpacing that of deposits is the fault of many CUs themselves, several analysts have told CUToday.info, noting the problem isn’t just the resulting liquidity pressures, it’s loans that are underpriced—particularly auto loans, after credit unions were too slow to increase rates.
“Yes, some credit unions have priced their loans below market, compared to others,” agreed Lis.
Money on the Move
Meanwhile, bank failures in the news have led some consumers to move funds from smaller institutions to larger national banks due to perceptions around safety.
“It's very easy now for members to move their money. We all have a phone in our hands and we can very easily transfer funds,” Lis noted. “We're starting to see some of the postmortem results from the failure of SVB and Signature Bank. People don't have to walk in and get their cash.”
New Challenge for Newer CFOs
Lis acknowledged that the rising rate landscape of the last year or so is likely a new experience for a large number of credit union CFOs.
Ed Lis
“The speed at which the Fed has moved in the past year to increase rates is unprecedented,” said Lis. “I know I wasn't in banking during the Reagan era, when (former Fed Chair) Paul Volker increased short-term rates to 22%. I do remember rates being high prior to the Great Recession. But I don't remember inflation and I don't remember the dynamics of money being able to move at the frequency and speed that it can now.
“A lot of credit unions had not positioned their balance sheet for a rising-rate environment because rates were so low for so long,” he continued. “Now that rates are where they are, you have to run two different scenarios—what happens if rates continue up and what happens if rates trend downward? You have to be able to have a risk/reward tradeoff, and understand what those tradeoffs are as well as the unintended consequences.”
Cost of Funds Increases
Lis pointed out, for instance, that rising rates have increased his shop’s cost of funds six-fold in the past year.
“Last March our cost of funds was 13 basis points and this March they were 80 BPs,” he explained. “We’ve had to restructure our money market account, the tiering structure. We've come up with some structured CD specials, not in an effort to attract money but in an effort to retain money.”
The pricing pressure will continue in 2023, Lis predicted.
“Of course, there is great potential for and even higher cost of funds this year,” said Lis. “If you look back around 2007, cost of funds continued to climb well after the Fed stopped hiking interest rates.”
One CU’s Response
Lis said his credit union has been actively responding to the marketplace.
“On the asset side, to help with liquidity, we've actually adjusted our rates considerably higher than others in the marketplace,” explained Lis, whose credit union was charging 7.56% on a six-year used auto loan for the best credit at the time of his interview with CUtoday.info. “All of the funds in our balance sheet have been accounted for. Either they're in investments or in loans. Even the money that's sitting in our corporate account.
“When we make loans now we go out and we basically say, what would be the cost of that loan if we had to borrow the money. So, we use the FHLB advance curve and that allows us to price in interest rate risk and a liquidity premium,” he continued. “We know the cost of underwriting our loans and our deposits, and we know the ROA that we need to maintain capital based on our projected asset growth.
Those Days Have ‘Passed’
“We're finding that our loan rates are higher than the competitive market, but it's the rate we need in order to balance liquidity and to be paid for the loans that we're making,” continued Lis. “It also allows us to slow loan growth to help with the liquidity pressure. By going through this process I think we understand the net yield and the cost of those loans and we're looking at what are the benefits of the loan growth and the cost of funding that growth. The cost of capital is very pricey. It's expensive. The days of the 1.99% car loan rate have passed.”
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